Investors or governments, who dictates the direction of property markets?

As more and more investors look towards the property market for their long-term investment needs, there is a heated debate about who actually dictates the direction of property markets. On one hand we have concerns governments around the world are squeezing property markets for tax income and pushing investors away. On the other hand, can governments really hold back the tide of money if investors feel a particular market has attractions in the longer term?

Markets always adapt

If you look at investment markets around the world which have experienced significant changes over the years, you will see they always manage to adapt. Any major changes will impact prices in the short term but once investors digest what is happening we often see revised valuation models come to the fore and the whole process starts again.

The vast majority of positive and negative changes will be introduced by governments and powerful bodies around the world. As those in the higher echelons of the political arena look to dominate markets such as property they often try to put their stamp on a particular area of the market. However, does this really work?

Fighting the tide of money

The UK property market over the last few years has given some interesting returns despite the fact the worldwide, European and to a lesser extent the UK economies are not exactly firing on all cylinders. In traditional investment environments we would not necessarily see UK prices pushed to the levels they are today. However, interest rates are extremely low, inflation has (on the whole) been under control and demand for property continues to grow.

So, even though governments find it difficult managing interest rates when property prices are buoyant (and economies are struggling) it is the ever constant flow of investment funds towards the UK property market which is dictating the direction at the moment.

New regulations, new approaches

The UK buy to let property market is a prime example of a market targeted by the government as something of a cash cow in these difficult economic times. The constant increase in taxation for those looking at buy to let investments and second homes did cause some concern when initially announced. There was a rush of investment prior to the cut-off date when new taxation levels came into play and then the market went quiet. Had the government tamed the beast?

Once investors had sat back, considered the situation and taken account of the long-term impact these tax rises would have on returns, they decided to venture back in numbers. Many buy to let investors feel cheated by the authorities but as rental income continues to rise, interest rates remain extremely low and real returns on the buy to let market remain attractive, government attempts to rein in the buy to let market seem to have failed.

Conclusion

Major changes in the way governments approach property markets around the world do have an impact in the short to medium term when very often confusion reigns. However, once investors are able to “get their heads around” the changes, rebase their valuation models and look further ahead, control begins to move back towards investors. At the end of the day, like King Canute and his attempt to hold back the sea, the ever-growing tide of investment funds is more powerful than short to medium term government attempts to disrupt markets.